It is very common forbusiness people and in-house lawyers to assume that theirprocedures for benefit determinations and benefit determinations onreview have been vetted by counsel and are fully ERISAcompliant.

Defending ERISA litigation is a reality that can beexpensive and frustrating. To minimize potential headaches andcosts, it is important not to inadvertently give your opponent anyunnecessary advantages.

One potential pitfall involves ERISA's detailed requirements forthe timing and content of benefit determination notifications and benefitdeterminations on review, as well as the requirements for appealsof adverse benefit determinations. Many of these requirements arefound in the Department of Labor's (DOL) rules regulating disability claims procedures (29 C.F.R. §2560.503-1).

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It is very common for business people and in-house lawyers toassume that their procedures for benefit determinations and benefitdeterminations on review have been vetted by counsel and are fullyERISA compliant. The same is true for the requirements applicableto appeals of adverse benefit determinations. It often comes as asurprise (and sometimes a source of embarrassment) when this is notthe case.

A lack of full compliance with these ERISA requirements can haveserious consequences in litigation. One of the most widely useddefenses in ERISA litigation is a plaintiff's failure to exhausthis or her administrative remedies. This means that a plaintiffmust follow a plan's claims and appeals process to completionbefore bringing a lawsuit. Also, a plaintiff cannot deviate from aplan's appeals process by engaging in other forms of self-help.

If an ERISA plaintiff fails to exhaust his or her administrativeremedies, the lawsuit is subject to dismissal at a very early stageof the case. In some situations, by the time the lawsuit isdismissed, the statutory or contractual limitations period forappealing a claim has expired. When this occurs, a plaintiff cannotbring a new lawsuit because there is no longer any ability for theperson to complete the plan's appeals process, which bars anyfuture lawsuit. However, when an entity is not in full compliancewith the highly technical requirements of the DOL's rules, it maylose its ability to obtain dismissal of a lawsuit based on aplaintiff's failure to exhaust administrative remedies.

This little-known exception to the exhaustion defense is knownas the “deemed exhausted” rule. The “deemed exhausted” rule meansthat if an entity is not fully compliant, then a plaintiff'sadministrative remedies will be deemed to have been exhausted, evenif the plaintiff never followed the plan's claims and appealsprocedures to completion.

The language of the “deemed exhausted” rule requires strict,technical compliance with all the tricky requirements of the rule.Thankfully for ERISA defendants, some courts have construed the“deemed exhausted” rule narrowly and have been reluctant to findthat a technical deficiency triggers the “deemed exhausted” rule.Instead, these courts have applied a “substantial compliance”standard, meaning that technical deficiency will not trigger the“deemed exhausted” rule. These courts include the Seventh, Eighth,Tenth and Eleventh Circuits. However, some courts, including theSecond Circuit, have taken the position that the “deemed exhausted”rule will be triggered when there is not strict compliance.

The Department of Labor, the agency that crafted the “deemedexhausted” rule, also takes a strict compliance approach.Nevertheless, without respect to how courts address technicalnon-compliance, it must be remembered that in situations where aclaimant is prejudiced by the absence of a fair and reasonableclaims procedure, courts uniformly find that the “deemed exhausted”rule has been triggered.

The takeaway is that compliance with the claims procedures inthe rule is very important and can have a significant impact onlitigation. Therefore, it is critical to verify that your claimsprocedures are fully ERISA compliant (even if you assume that theyare). You might be surprised what you find. However, in situationswhere there may be a lack of technical compliance with theserequirements, there is a substantial body of case law supportingdismissal for failure to exhaust administrative remedies,notwithstanding the strict compliance standard set forth.

Read more:

• The evolution of ERISA and employee retirementplans
• How ERISA affects 'top-hat' compensationplans
• Compliance hurts, but ERISA & IRS penaltieswill hurt even worse

David Massey, a partner in Hogan Lovells'Miami office, focuses on being an advisor and business partner toclients with complex business challenges in high-stakes andbet-the-company matters.